Can we systematically make determinations of right and wrong in a market capitalist economy without undermining the benefits that capitalism is supposed to afford us? Why does it seem to some businesspeople that this foundational question in business ethics—that of right and wrong conduct in business—cannot always be answered by appealing to the intuitions of everyday or common morality? These are the questions that animate Joseph Heath’s Morality, Competition, and the Firm, which offers a thorough exposition of the so-called “market failures” approach to business ethics. The book represents an important contribution to the field of business ethics, particularly with respect to the normative underpinnings of managerial responsibility.

Heath’s work offers a comprehensive account of the responsibilities of market actors based in economic and political theory. Not including the introduction, the book is comprised of thirteen chapters, ten of which have been published previously, either as journal articles or book chapters. This introduces some redundancies throughout the book and means that one must often look through a number of chapters to find the various arguments for or against a given position. Despite this drawback, with the collection of the prior works and the addition of the three new chapters in one place, the book at once elucidates the normative foundations of the market failures approach and outlines its implications for how we ought to think about questions of business ethics and corporate governance in scholarship, practice, and teaching.

Part I of the book, “The Corporation and Society,” encompasses chapters one through five. The aim of Part I is to outline and defend the market failures approach to business ethics and to critique two other dominant branches of normative business ethics: stakeholder theory and corporate social responsibility. Chapter one elegantly sets the stage for the rest of the book by providing a summary of the normative foundations of the market failures approach and some of its key implications. Heath advances some arguments in favor of the profit motive, carefully distinguishing it from utility-maximization and managerial self-interest. He outlines how his view dovetails with that of Milton Friedman in its basic conclusion that the obligation of managers is to maximize profits, but also the ways in which their views diverge with respect to what makes certain means of profit maximization permissible or not. In particular, because the market failures approach is predicated on the argument that the conditions necessary for Paretian economic efficiency must constraint the profit motive, it is this principle that forms the foundation for business ethics teaching and practice. Therefore, Heath critiques Friedman’s argument for “arbitrarily [limiting] the set of obligations to those that support only some of the many Pareto conditions” (35, emphasis added).

Together, chapters two through five serve as an extended critique of theories that require managers to promote the interests of non-shareholder stakeholders. Chapter two, “Stakeholder Theory, Corporate Governance and Public Management,” which was originally published as a co-authored journal article with Wayne Norman, outlines the pair’s critique of stakeholder theory and corporate social responsibility from the perspective of the market failures approach. To do so, they appeal to the economic problems of moral hazard and adverse selection, making use of the historical lessons to be learned from failures of public management of state-owned enterprises after the Second World War. The critique of stakeholder theory continues in chapter three, which is a reprint of the well known article, “Business Ethics without Stakeholders.” Heath argues that stakeholder theory is either too arbitrary when defining stakeholders narrowly, or undermines the idea of what it means to be a fiduciary when defining stakeholders more broadly. He also advances the argument that business management, like other professions, encompasses a “complex body of knowledge” that “generates an information asymmetry, which creates a moral hazard that threatens to undermine any market transaction involving such specialists” (72). Therefore, the challenge for managers is to cultivate trust in potential commercial partners. The solution Heath proposes is the market failures approach, arguing that the obligations of managers ought not to be derived from ordinary morality, but from the conditions that give rise to Pareto efficiency. The overlap in arguments in chapters two and three might have warranted a new, revised chapter for this particular book. Nevertheless, these chapters together yield a compelling critique of stakeholder theory and corporate social responsibility, while also fleshing out how the market failures approach would guide a theory of business ethics as professional ethics.

Chapter four, also a reprint of a well known article, “An Adversarial Ethic for Business: or, When Sun-Tzu Met the Stakeholder,” introduces a new distinction and an analogy that together generate some specific rules of thumb for ethical business behavior, making it an important chapter for understanding how the market failures approach ought to be applied. Specifically, Heath distinguishes between market and administered transactions, analogizing business ethics to the morality of sports. This distinction and the accompanying analogy are the basis for the claim that while competitive norms are called for when businesspersons are engaging in market transactions outside of the firm, cooperative norms are called for when engaging in administered transactions within the firm. The rules of thumb that follow from this are: (1) to use Pareto conditions for perfect competition as the starting point for ethical business behavior, which means not exploiting market failures such as “externalities, information asymmetries, and market power;” (2) not to cheat and to follow the spirit as well as the letter of the law; (3) not to game the rules, for instance, by taking advantage of loopholes; and, (4) to “take the high road,” as others’ ethical failures do not create permissions for you to do the same (111–113).

In chapter five, “Business Ethics and the ‘End of History’ in Corporate Law,” Heath offers an extension of Henry Hansmann’s arguments in The Ownership of Enterprise (1996). Specifically, while Hansmann and John Boatright (Reference Boatright2006) take the position that Hansmann’s arguments for understanding business corporations as lenders’ cooperatives vindicate their view of shareholder primacy, Heath proposes that they support the market failures view instead.

Part II, “Cooperation and the Market,” includes chapters six through nine. In these chapters, Heath outlines in detail the economic and political theories upon which the market failures approach relies. Specifically, chapter six outlines his view that cooperative endeavors ought to be understood using a cultural-evolutionary perspective, which means understanding the trade-off between efficiency and equality as a practical exercise rather than a philosophical one. Chapter seven is an important chapter for its implications on business ethics. In it, Heath provides a lengthy defense of the argument that efficiency, as the implicit morality of the market, is the principle that ought to form the foundations for business ethics. However, Heath makes clear that managers are simply expected to pursue profits in the market without concerning themselves with efficiency calculations; rather, they need only operate according to rules of thumb derived from efficiency considerations. This argument presents an important area for further scholarly discussion. For instance, it is possible that managers may, in fact, need to have a sense for when profit orientation results in actions that promote Pareto efficient outcomes or not, such as in cases when the rules of thumb derived from the market failures approach yield ambiguous results.

Chapter eight, which offers an intellectual history of the “invisible hand,” argues that business ethicists and regulators ought to pay close attention to how price information and incentives may affect market competition over time if they wish to achieve Pareto efficiency. Chapter nine offers a look at the benefits of cooperation from the social contract perspective, outlining five common mechanisms (economics of scale, risk pooling, self-binding, and information transmission) that solve variations of the free rider problem and the implications that these mechanisms have for a well-functioning welfare state.

Part III, “Extending the Framework,” made up of chapters ten through thirteen, focuses on the application of the market failures approach to specific questions of business ethics. These chapters introduce several arguments and questions that should prove fruitful territory for future inquiry. Chapter ten uses the market failures approach both to critique and bolster certain aspects of agency theory. In particular, Heath argues that business ethicists have underappreciated agency theory, properly understood, and calls out the various ways in which agency theory is commonly misused by its proponents. In his view, agency theory understood as critical theory is a useful tool for business ethicists to diagnose and communicate ways in which a lack of business ethics contributes to corporate wrongdoing. His argument and the examples used to illustrate it are compelling. Furthermore, his point that shareholders are uniquely vulnerable because their interests are not represented by contracts, unlike other stakeholders, merits further attention from the business ethics community.

In chapter eleven, “Business Ethics and Moral Motivation: a Criminological Perspective,” Heath argues that to increase the effectiveness of business ethics pedagogy, the market failures approach may be complemented by criminological findings on the causal roots of white-collar crime. Eschewing “folk theories” of motivation, character, greed, and values in favor of the situational explanations proposed by social psychologists, Heath argues that instructors should focus not on “[reducing] the chances that students will behave unethically,” but on “[reducing] the chances that students will go on to commit major felonies” (2014: 318). Interestingly, there are some parallels with Mary Gentile’s Giving Voice to Values (2012) approach, for instance, in listing the various ways in which business people distance themselves from the ethical implications of their actions through the use of common rationalizations. This raises the question whether the important thing is not the shift in focus on prevention of unlawful behavior so much as adopting an approach based in behavioral, rather than normative, business ethics.

Chapter twelve argues that virtue ethics forms an inadequate basis for business ethics, given the social psychological situationist critique, the sociological evidence against the usefulness of vice as a predictor of criminal behavior, and the political argument from neutrality with respect to competing conceptions of the good. While some business ethics scholars (e.g., Alzola, Reference Alzola2012) have capably demonstrated some problems with the situationist critique of virtue, all three sets of arguments would benefit from further scholarly investigation.

Lastly, in chapter thirteen, Heath shows the kinds of restrictions the market failures framework would generate for the insurance underwriting process.

While perhaps controversial in scholarly business ethics circles, there is little doubt that the market failures approach is likely be rhetorically powerful for reaching students and practitioners of business, as it appeals to an intuition that most of them already hold: that the point of market capitalism is efficiency in the production and allocation of goods, and, to the extent that profit maximization contributes to that end, profits should guide business decision-making. It may also surprise business ethicists and practitioners alike that such a minimalist principle should produce rather demanding normative standards of conduct in business. However, if one believes that the end of capitalism is something else, or that market actors ought to balance efficiency with other important values, then one may not be entirely convinced. Nevertheless, the arguments for the market failures approach deserve to be engaged by the business ethics community, if only to further elucidate an alternative to the now prevalent normative conceptions of capitalism, markets, and business conduct.